When someone decides to set up…

Published: 2020-05-17 03:16:04
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Category: Accounting

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When someone decides to set up a business, he has to determine which form of business structure is best for his business to take. The three common types of entities in which business can conducted :-Sole proprietorshipPartnershipCorporation.Each type of business entities has advantages and disadvantages. JJ owns all assets and properties of his business. He has to bear all the risk of the business. A sole proprietorship can be dissolved easily when JJ stops doing the business3. One man’s CapitalThe capital required by the business is totally arranged by JJHe provides the fund either from his own personal resources or by borrowing from family, friends, banks or other financial institutions.In case of profit, JJ gets the whole profit of the businessIn case of loss, JJ must also bear all of the lossesNobody else shares the profit and loss of the business with JJ5. Unlimited LiabilityThe liability of the owner is unlimited JJ is liable for all of the debts, obligations and losses of the businessJJ is forced to pay the business liabilities using his personal properties in order to cover his debts.6. Separate Accounting EntitiesThe transactions associated with a business must be separately recorded from those of its owners or other businessesThe business and JJ are treated as two separately identifiable parties. Business’s transactions must be recorded separately from the personal transactions of JJ, in order to check the true financial condition of the business.The accounting for a sole proprietorship does not require a separate set of accounting records, since JJ is considered to be inseparable from the business. Accounting requirements are more simple than corporationJJ should maintain records for business activities, in order to judge whether these operations are generating a profit.JJ can start the business with a very little capital.JJ uses Big Tea Rice” as business name, he only needs to register the business name, and license the business.There is no formal procedure to form a sole proprietorship and there are few formal accounting requirements. JJ does not need to prepare any legal documents because he is not in business with someone else, and he does not have to set up an elaborate business structureBecause formation is so easy, this also makes a sole proprietorship the cheapest business entity to set up. Sole proprietors are not required to file separate tax returns for their business.Income made from the business is counted as JJ’s personal incomeHe will only have to pay individual income tax based on his annual income.JJ does not have to pay corporate taxes or business taxJJ can avoid double taxation because all business income, profits, losses, and expenses are reported on his personal income tax return. sole proprietorship do not have to face the same formalities and requirements that corporations face.JJ does not need to prepare an annual reportJJ is not required to hold annual meetings, board meetings or voting .Formal review or approval process are also not requiredSole Proprietorship will have his or her own business rules.As a sole proprietor of the business, JJ has complete control over all the operations because there is only JJ who owned the business. He makes all the decisions to run the business without seeking approval from partners or shareholders.This form of organization gives the proprietor maximum freedom to run the business and respond quickly to day-to-day business needs. JJ also has the right to retain all profits of the business.The finances of the business and the owner are the sameThere is no separate legal entity, no separation between business assets and the owner’s personal assets.JJ is personally liable for any debts, losses and liabilities of the business.If the business is successfully sued, JJ could lose his house, cars, bank account and any other personal assets to settle any business debts or bankruptcy.JJ cannot raise capital by selling shares or stock in his businessJJ is the primary source of his business’ fundingJJ has to rely on his own savings and loans from friends and family.Banks and financial institutions are less willing to provide loans to sole proprietorship because they are often perceived as less dependable when it comes to repayment.A sole proprietor may not have the wide range of skills in every fields such as management, marketing, finance and accounting. Due to limited financial resources, JJ may also not possible to employ a professional manager to run the businessSince a sole proprietor is not an expert in all fields, therefore, JJ may make some decisions.The life of the business is linked to the life of the sole proprietor. The owner and the business are considered one and the sameThe business will be automatically dissolved if JJ dies, retires, decides to sell the business or simply closes the businessThe continuity of business operation is uncertain.

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